What is Exit Planning and Why is It So Important to Business Owners?

If you are unclear exactly what exit planning is in a business environment, Chris Schneider, the President, and CEO of Exit Planning Institute coined the definition like this:

“In a nutshell, an exit plan asks and answers all the business, personal, financial, legal and tax questions involved in transferring or transitioning a privately owned business.”

When dealing with exit planning, we simply focus on moving a privately owned business from one owner to potentially another owner.

So why do you need an exit plan? Maybe you’re thinking of leaving your business to the next generation. Maybe you want to work until you can’t anymore. No matter how much you want to, the fact is you will not own your business forever. That means you need an exit plan. Here’s why.

According to statistics from the Exit Planning Institute, the premier institution on exit planning, the average business owner has about 80% of their net worth tied up in their business. That’s a good chunk of net worth bound up in one asset, which could be a bad thing. A business owner is often focused on many areas. This is where an exit planner comes in. You can employ them to work on helping you grow your largest asset, the business, and making it more valuable to a future buyer.

In the next ten years, three out of four businesses will change ownership. The reason behind this is wrapped up the market collapse of 2008. So many of the business owners were nearing retirement age, but the economic downturn caused these owners to delay their retirement by a couple of years.

Here’s the scary part. Of those owners, 75% percent of them do not have any type of financial plan whatsoever and even fewer know about exit planning or the options available to them. That’s tragic and terrifying! Basically, these guys and gals are ready to hang it up, yet have no clue how to walk away. The heartbreaking part—many of these individuals sunk their life, blood, sweat, and tears into these businesses. Now they’re trying to find a way to enjoy the fruits of their labor without letting employees or family down. Not only that, many owners could end up destitute if they stop altogether. Or if they do sell the business to someone, their lack of planning will cost them. Most likely the buyer won’t give top dollar for the business.

Most people assume financial planning is all about investing in stocks and bonds; however, that couldn’t be further from the truth. It’s about money management, especially if you hire a true wealth manager. In fact, one facet of financial planning is making sure that the business owner has the right amount of assets needed to make that exit and live the rest of their lives the way they’re accustomed to.

Of those who do end up selling, a staggering, 75% are unhappy afterward for a plethora of reasons. However, most of that dissatisfaction is likely attributed to the lack of exit planning on their part. As business owners, they knew how to grow and run a successful company, but planning to sell wasn’t their area of expertise. After the sale, they realize just how much money they lost in the transfer. And now, they don’t have enough money to live the lifestyle they’re acclimated to living.

So, what is business exit planning going to do for your particular company? This planning will take steps some years before you want to sell, making the necessary preparations to maximize your business’ value at the time that it sells, with the goal of returning an amount at or above the number you need to keep you in your current lifestyle. For that, planning needs to start at least ten years prior to selling and ongoing until the transition date. Therefore, it is imperative to work with individuals trained to optimize your choices. Those who will help you take advantage of the value of your business, incorporating all of the tax, financial, and legal strategies to reap the rewards of your greatest asset.

If you are one of that 80% of business owners whose net worth is often tied up in the business, I don’t want you to become another statistic. Work with a Certified Exit Planning Advisor to capitalize on all the benefits of your hard work.